Computer trading in bonds won’t match stock level, McKinsey says

“Fewer than 15% of respondents say they are willing to provide firm quotes on such systems, making it difficult to attract liquidity,” the report said.

The ability for investors to find the bonds they wanted to buy or sell was “not as bad as many had feared” in the 18 months before mid-spring of this year, according to the report. “Around 30% of survey respondents said that liquidity had actually improved during the prior 18 months,” the report said.

The effect of regulations related to the capital levels banks must maintain and other restrictions will make it harder to find debt to trade, according to 80% of U.S. investors surveyed and 55% in Europe, the report said.

Dealer Inventory

The market for company debt, which generally trades over the counter, is growing less liquid as the biggest banks reduce the volume of their own money they use to facilitate credit trading. The 21 primary dealers that do business with the Federal Reserve have reduced their holdings by 76% since the peak in 2007 through the end of March, according to Fed data compiled by Bloomberg.

That reduction may not fully reflect the amount of corporate bonds held by dealers due to the Fed’s inclusion of non-agency mortgage backed securities in the data, the report said.

“It is safe to say that this change in net inventory did not have a direct impact on corporate bond liquidity,” the report said.